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May 11, 2011

At Summit Meeting, China to Allow U.S. Asset Managers to Sell Mutual Funds

Second largest economy in world pledges to allow foreign banks to underwrite bonds, sell some insurance products

Following a two-day summit meeting in Washington between top U.S. and Chinese government officials, China said in a formal post-meeting joint statement that it was “committed to continue and extend financial sector reform” internally.

As part of that commitment, China said it would allow U.S. and other foreign banks incorporated in China to sell mutual funds in the country and confirmed that “there are no barriers to foreign banks to sell other types of wealth management products” to Chinese consumers.

The headlines from the meeting focused on human rights and the Chinese agreeing to move toward, in the statement’s words, “market-determined interest rates,” But if the Chinese market was truly opened up to U.S. mutual funds, it would constitute a major market opportunity for American asset management firms. As with many other American firms in multiple industries, China is viewed as a major new market, with a growing middle class that appears to be interested in all manner of consumer products.

In addition, China said it was already moving forward to allow foreign banks to underwrite corporate bonds; following the release in April of Chinese regulators’ unveiling of criteria for underwriters, the statement says “many” U.S. and other foreign underwriters filed applications to serve as underwriters.

The agreement said that these and other moves would “help level the playing field with China’s SOEs [state-owned enterprises] … and create opportunities for private enterprises – including American firms – across a broad range of service sectors.” Among those sectors is insurance, specifically third-party liability insurance. China said it would “advance toward allowing” U.S. and other foreign insurers to sell such policies to Chinese consumers in what the statement said was now “the world’s largest market for automobiles.”

The talks, formally called the U.S.-China Strategic and Economic Dialogue, was the third in a series of meetings between Chinese and U.S. officials. Hosting the May 9-10 meeting was U.S. Treasury Secretary Tim Geithner and Secretary of State Hillary Rodham Clinton (left). China’s representatives were Vice Premier Wang Qishan and State Councilor Dai Bingguo.

In a press conference, Geithner noted that China and the U.S. still had “very, very different economic systems,” that China’s economy was still largely state-dominated and that its financial system remained “ fundamentally directed by the state.” But, he said, “they’re changing,” and said the U.S. was “very confident we’re going to see substantial ongoing improvement in the opportunities that American companies have in the Chinese market.”

Geithner went on to say that “we welcome Chinese investment in the United States, and I am very confident that ... over the next several years, you’re going to see Chinese investment in the United States continue to expand very, very rapidly.” He said the U.S. recognized that “China’s own investment regime is a much more restrictive regime with a much more careful management and set of limitations on the ability of foreign firms to invest and purchase stakes in Chinese companies, but that’s changing, too.”

According to the Investment Company Institute (ICI), there were 666 mutual funds operating in China at year-end 2010, with $365 billion in assets out of a worldwide total of $24.7 trillion in mutual fund assets. By contrast, ICI reported that there were 7,500 mutual funds operating in the U.S. at year-end 2010, holding $11.8 trillion in assets.

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